Is European Luxury Retail Effectively Saved by the Great Travel Recovery?
There are indications that luxury spending by European tourists is on the verge of recovery.
Tax refunds provide a useful insight into the current level of European luxury spending. Bank of America's analysis, based on data from payment solutions provider Planet, indicates that the total amount of tax refunds completed to international tourists in Europe in the first quarter of this year was 13 per cent lower than levels in the same period in 2019. This is in comparison to the last quarter of last year, when levels of refunds declined by around 18 per cent year-on-year compared to 2019. February 2024 saw a particularly high level of tax refunds. Analysts anticipate that a gradual return to pre-epidemic levels of travel spending will help to offset the slowdown in interest in luxury goods among local European consumers. Claudia D'Arpizio, Senior Partner and Global Head of Fashion and Luxury at Bain & Company, commented: "We anticipate a full recovery in the luxury sector by the end of the 2024 global year.
Prior to the outbreak, international tourist spending accounted for 40 to 50 per cent of European luxury revenues. International travellers are frequently drawn to Europe's competitive pricing and high-quality retail environment. Bain has indicated that the relaxation of travel restrictions has led to a significant increase in the number of US and Middle Eastern tourists, which has contributed to the European market achieving 7% growth in 2023. In the first quarter of this year, the amount of tax refunds to US consumers increased by 100% compared to the same period in 2019, while refunds to Middle Eastern consumers increased by 68%. Ashley Wallace, Managing Director of Non-Essential Consumer Goods for Europe, the Middle East and Africa at Bank of America Global Research, stated, "Today, Americans continue to be the most important tourists for many luxury brands in Europe."
There is no indication that the decline in local spending on luxury goods in Europe will be reversed by 2024. Therefore, it is important to maintain the positive momentum of sales in the European market by continuing to grow tourism.
The recovery in tourism has been more pronounced in some countries than in others. France, for instance, saw tax refunds in February that were 9% higher than in the same month in 2019. France is Europe's leading luxury powerhouse and will host the Olympics this year. It is the only tracking country so far to have exceeded its pre-epidemic figures in some respects.
A recent analysis by the Financial Times indicates that per capita spending by non-EU tourists in the UK is on a downward trend. The UK government's decision in 2021 to abolish tax-free shopping has been cited by the fashion and luxury industries as a key reason for the UK's economic downturn. European markets are also competing for Chinese tourists from short-haul destinations in Asia and popular Chinese domestic holiday destinations such as Hainan Island. The anticipated recovery of long-haul travel among middle-class consumers is likely to be slower than initially projected, as many Chinese consumers are experiencing the impact of the current economic situation.
This has strategic implications for brands. In the short term, it is prudent to prioritize the VIP customer. Bain & Company's Claudia D'Arpizio recommends that brands focus on client events, private one-on-one activities and mutually beneficial partnerships with luxury tour operators. "The traditional practice of solely transactional payments will be significantly diminished," she states.
